Balance of payments:

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1

• Indonesia’s balance of payments (BoP) registered a deficit of USD 1.8 Bn in Q1-2022. The financial account continued to post a deficit, but it was the current account’s deterioration that drove the decline in BoP (Chart 1).

• In turn, the worsening current account (CA) was caused primarily by three main factors. The first, as we have mentioned often in the past, was repressed commodity exports relative to the global price and demand levels, courtesy of the government’s coal export ban in January. A similar effect will likely be seen for Q2 as well, due to a ban in CPO (and other palm oil products) exports, which similarly lasted for only less than a month after last week’s announcement to re-allow exports.

This on/off export control dynamics may well appear again if local inventories run low, which is probable given that local prices for these commodities continue to run below their global levels.

This seems particularly true for coal, where the partial adjustment of DMO prices (in March, for cement and fertilizer industries) and electricity prices (upcoming, for large-wattage households only) still has not kept up with surging global prices.

• The second was rising imports, mainly due to elevated oil prices but also – particularly in March – due to restocking by local wholesalers and retailers. And just like the first factor, this may come up again over the next few quarters, considering the persistent global inflation as well as the robust domestic demand that was evident from our transaction data during Ramadan. Given the government’s recent decision to increase fuel subsidies in lieu of raising domestic fuel prices, it is inevitable that some of this consumer surplus will be used on imported goods, leading to further increase in imports.

• The third factor was the widening services deficit (Chart 2), especially for travels. While Indonesia has scrapped its quarantine requirements for fully-vaccinated foreign visitors and increased the number of countries eligible for Visa on Arrival (VoA), the tourism sector remained far below its usual capacity – and the Omicron outbreak in Q1 did not help either. Interestingly, outbound travel

Executive Summary

▪ Indonesia’s balance of payments (BoP) registered a deficit of USD 1.8 Bn in Q1-2022, driven by a decline in the current account (CA).

▪ While we would likely see improvements in the CA, the government’s efforts to control domestic inflation would limit the potential gains from high commodities prices.

▪ At the same time, the Fed’s hawkish stance would hasten capital outflows and cause the financial account to deteriorate further over the coming months.

▪ As a result, BI would likely need to raise its policy rate anywhere from 50 to 150 bps to preserve real yield differentials between Indonesia and the US.

Flipping the script, temporarily

23 May 2022

Keely Julia Hasim Economist/Analyst

Barra Kukuh Mamia Senior Economist

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2

expenses seemed to have rebounded more strongly, a function both of earlier relaxation of travel restrictions in many other countries as well as pent-up demand for religious pilgrimage.

• While all these seem to suggest that the CA is set to deteriorate further in the future, we think that the Q1 figure (a 0.07% surplus relative to GDP) was probably a low point, simply because rising commodity prices – as we saw in April – managed to produce bumper exports for Indonesia.

We concur, however, that the CA is likely to disappoint compared to the gaudy expectations (2%

or more) that some analysts have predicted based on commodity prices alone, and it will likely be closer to 0.5 – 1.2% of GDP. This is largely the function of the aforementioned export bans and subsidies, i.e. sacrificing CA surplus in order to control domestic inflation.

• In contrast, the financial account side saw an improvement in Q1 that would probably not be sustained for the rest of the year. In particular, there was a surge in equity inflows primarily into energy/commodity stocks, as well as additional inflows coming from the government’s global bond issuance and foreign loan uptake. Unfortunately, the situation is reversing in Q2, with the Fed’s hawkish policies – coupled with earnings uncertainty engendered by the export bans – would likely hasten outflows from both bonds and equities. The one bright spot that is set to continue is FDI, where we expect further investments into the primary sectors as well as manufacturing and logistics, amid the backdrop of supply-chain disruptions.

• The question, then, is whether CA or the financial account is more influential in determining the exchange rate – given that we expect improvement in the former, but more pressure for the latter. Using data from several EMs (Charts 3 and 4), it appears that recent exchange rate change vs. the USD is not particularly correlated with CA balance. On the other hand, it is more closely correlated (albeit still rather weakly) with real policy rates, which could be a determinant of portfolio inflows.

• Since inflation obviously reduces real rates, this justifies the government’s choice to sacrifice part of the CA surplus to curb inflation. However, we would argue that inflation may still exceed 4%

YoY even without energy price adjustments, simply because global inflation may start to affect food and fertilizer prices in the coming months. In addition, strong investment growth would lead to strong demand in financing, and when combined with diminished private savings (due to narrow CA) could result in a big financing gap (Chart 5). Historically, such a large financing gap is associated with higher real interest rates (Chart 6).

• As such, we maintain our view that BI could hike by anywhere between 50 – 150 bps this year, owing to the need to maintain real yield differentials against rising UST yields. With fuel hikes likely off the table for the year, however, the timing of the initial hike would be largely determined by external shocks, both pertaining to inflation and Fed policy tightening.

“While all these seem to

suggest that the CA is set to

deteriorate further in the future, we think that the Q1

figure was probably a low point, simply because rising commodity prices – as we saw in April – managed to produce

bumper exports for

Indonesia.”

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3 Chart 1. The financial account continued to post a deficit, but it was the current account’s

deterioration that drove the decline in BoP

Source: Bank Indonesia Last update: Q1-2022

Chart 2. The services balance continues to deteriorate as tourism earnings remain near zero while other service imports rise

-0.5 -0.4 -0.3 -0.2 -0.1 0 0.1 0.2

Others ICT Freight Tourism Total

USD Bn

Services Balance:

0.0 -1.7

-0.8

-1.5 -4.0

-8 -6 -4 -2 0 2 4 6 8

Q1-11 Q2-11 Q3-11 Q4-11 Q1-12 Q2-12 Q3-12 Q4-12 Q1-13 Q2-13 Q3-13 Q4-13 Q1-14 Q2-14 Q3-14 Q4-14 Q1-15 Q2-15 Q3-15 Q4-15 Q1-16 Q2-16 Q3-16 Q4-16 Q1-17 Q2-17 Q3-17 Q4-17 Q1-18 Q2-18 Q3-18 Q4-18 Q1-19 Q2-19 Q3-19 Q4-19 Q1-20 Q2-20 Q3-20 Q4-20 Q1-21 Q2-21 Q3-21 Q4-21 Q1-22

-1.2 1.7

-1.1 0.1 -0.6

% of GDP

◼Current Account ◼FDI ◼Portfolio Investment

◼Other Investment Balance of Payments

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4 Chart 3. Declining FX liquidity has a high historical correlation with IDR depreciation

Source: Bloomberg Last update: Nov-2021

Source: Bloomberg, BCA Economist calculations

IDR THB MYR

PHP

INR

MXN BRL

R² = 0.0638 ZAR

-8.0 -6.0 -4.0 -2.0 0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0

-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0 4.0

Chart 3. The YTD change of EM currencies vs. the USD is not strongly correlated with CA balance

Currency vs. USD, YTD

current account (% of GDP)

IDR MYR

THB PHP

INR MXN

BRL

ZAR R² = 0.2089

-8.0 -6.0 -4.0 -2.0 0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0

-5.0 -4.0 -3.0 -2.0 -1.0 0.0 1.0

Source: Bloomberg, BCA Economist calculations

Currency vs. USD, YTD

Real policy rate

Chart 4. The YTD change of EM currencies vs. the USD is more closely correlated with real policy

rates, albeit still rather weakly.

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5 -6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 Jan-22

4.7%

(867 T)

4.3%

(793 T) 1.5%

(95 T) 6.1%

3.6%

Source of financing:

― Private sector surplus ― Foreigners and BI (burden sharing)

Financing needs IDR (lines = unrealized):

◼ Credit ◼ Capital markets ◼ Gov’t bonds

Chart 5. Strong financing demand combined with diminished private sector savings could result in a big financing gap

2.3%

-6.2%

-12.0%

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

Financing gap (% of GDP) Change in real rates

― Financing gap (% of GDP) (rhs)

― Change in real rates (lhs)

Chart 6. Large financing gaps are associated with higher real interest rates

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6 Selected Macroeconomic Indicators

Table 1. Balance of payments (current USD Million)

Q1-21 Q2-21 Q3-21 Q4-21 Q1-22 2019 2020 2021

CURRENT ACCOUNT -1,087 -1,929 4,950 1,496 221 -30,279 -4,433 3,430

(as % of GDP) 9.66 8.77 8.64 7.76 6.96 -2.71 -0.42 7.76

A.Goods 7,628 8,337 15,408 12,433 11,140 3,508 28,301 43,806

- Non-Oil/Gas 9,976 11,581 18,120 18,128 17,210 11,965 29,954 57,804

- Oil/Gas -2,269 -3,144 -2,508 -5,045 -5,855 -10,319 -5,386 -12,965

B.S ervices -3,394 -3,707 -3,601 -3,976 -4,407 -7,641 -9,755 -14,678

C.Income -6,753 -8,023 -8,274 -8,910 -8,007 -33,775 -28,911 -31,961

D. Current T rans fers 1,432 1,465 1,417 1,950 1,494 7,629 5,932 6,264

CAPIT AL T RANS ACT IONS 2.21 4.91 9.96 63.00 0.88 39.06 36.91 80.08

FINANCIAL T RANS ACT IONS 5,757 1,671 6,717 -2,250 -1,704 36,564 7,884 11,895

A. Direct Inves tment 4,492 5,392 3,235 3,785 4,467 20,531 14,142 16,904

B. Portfolio Inves tment 4,903 3,998 1,198 -5,024 -2,944 21,990 3,369 5,076

C. Derivative Ins truments 110.06 23.75 172.24 26.65 136.76 186.40 17.73 332.71

D. Other Inves tment -3,748 -7,743 2,111 -1,038 -3,364 -6,144 -9,645 -10,418

NET ERRORS AND OMIS S IONS -607.50 -196.64 -987.38 -152.74 -334.59 -1,647.91 -891.30 -1,944.26 BAL ANCE OF PAYMENT

(= change in BI international res erves )

4,065 -450 10,690 -844 -1,817 4,676 2,597 13,461

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7

** Estimation of Rupiah’s fundamental exchange rate

2017 2018 2019 2020 2021 2022E

Gross Domestic Product (% YoY) GDP per Capita (US$)

Consumer Price Index Inflation (% YoY) BI 7 day Repo Rate (%)

USD/IDR Exchange Rate (end of year)**

Trade Balance (US$ billion)

Current Account Balance (% GDP)

5.1 3877

3.6 4.25 13,433

11.8 -1.6

5.2 3927

3.1 6.00 14,390

-8.5 -3.0

5.0 4175

2.7 5.00 13,866

-3.2 -2.7

-2.1 3912

1.7 3.75 14,050

21.7 -0.4

3.7 4350

1.9 3.50 14,262

35.3 0.3

4.8 4615

4.2 4.0 14,660

48.5 1.4

Indonesia – Economic Projections Table

PT Bank Central Asia Tbk

Economic, Banking & Industry Research of BCA Group 20^th Grand Indonesia, Menara BCA

Jl. M.H Thamrin No. 1, Jakarta 10310, Indonesia Ph : (62-21) 2358-8000 Fax : (62-21) 2358-8343

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Economic, Banking & Industry Research Team

David E. Sumual Chief Economist

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Agus Salim Hardjodinoto Barra Kukuh Mamia Victor George Petrus Matindas

Senior Industry Analyst Senior Economist Senior Economist

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Gabriella Yolivia Derrick Gozal Livia Angelica Thamsir

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Keely Julia Hasim Lazuardin Thariq Hamzah Ahmad Aprilian Rizki

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